Overview

AVX Corporation is a leading worldwide manufacturer and supplier of a broad line of passive electronic components and interconnect products. Electronic components and connector products manufactured by AVX are used in virtually all types of electronic products, including those in consumer electronics, telecommunications, automotive military/aerospace, medical, computer and industrial markets. The Company has five main product groups: Ceramic Components, Tantalum Components, Advanced Components, Connectors and Kyocera Electronic Devices. These product lines are organized into three reportable segments: Passive Components, Connectors and KED Resale.

Consolidated revenues for the fiscal year ended March 31, 2009 were $1,389.6 million with net income of $80.8 million compared to consolidated revenues of $1,619.3 million with net income of $149.5 million for the fiscal year ended March 31, 2008. During the second half of fiscal 2009, we saw lower demand resulting primarily from weakness in the consumer electronic and automotive markets reflecting the downturn in global economic activity and disruption in the global financial markets. Supply chain inventory levels have remained lean throughout the fiscal year as distributor customers and end product manufacturers remain cautious and wait for improved end user demand before replenishing inventory levels. Overall sales prices for our commodity component products decreased slightly during the fiscal year. While we cannot predict how long this economic downturn will last, we are proactively taking actions to reduce overhead costs and other expenses. We continue to manage our production output and tightly control our cost structure. We responded quickly to the downturn in orders and initiated aggressive cost reduction actions during the second half of the fiscal year. We incurred $18.6 million of restructuring charges, primarily related to global headcount reductions and factory shut downs at three facilities. We are continuing to reduce costs in line with global economic conditions and expect to incur additional restructuring charges during fiscal 2010. We also recorded an $18.2 million environmental charge as an estimate of our potential liability related to performance of certain environmental remediation actions at an abandoned facility in New Bedford, Massachusetts.

Despite uncertainty in the global economic environment, our financial position remained strong and we delivered strong operating cash flows. In fiscal 2009, we generated operating cash flows of $65.0 million. We use cash generated from operations to fund capital expenditures, repurchase shares of our common stock, which are held as treasury stock, and pay dividends. We have $762.5 million of cash, cash equivalents and securities investments and no debt as of March 31, 2009.

We remain committed to investing in new products and improvements to our production processes as well as continued investment in research, development and engineering in order to provide our customers with new generations of passive component and connector product solutions. We are currently producing more sophisticated electronic component parts necessitated by the breadth and increase in functionality of the electronic devices that are manufactured by our customers. As a result, we have continued our focus on value-added advanced products and connectors to serve this expanding market. We are also focused on controlling and reducing costs to accommodate market forces. We do this by investing in automated manufacturing technologies, enhancing manufacturing materials and efficiencies and rationalizing our production capabilities around the world. We believe that this philosophy will enable us to adapt quickly and benefit when market conditions improve and provide shareholder value.

In addition, we may, from time to time, consider strategic acquisitions of other companies or businesses in order to expand our product offerings or otherwise improve our market position, as illustrated by the acquisition of American Technical Ceramics Corp. ("ATC") in September 2007, which further enhanced our product line offerings of value-added advanced products. We evaluate potential acquisitions in order to position ourselves to take advantage of profitable growth opportunities.

Outlook

Near-Term:

We expect that fiscal 2010 may be another challenging year, but with the possibility of a rebound in market demand. Near-term results for us will depend on the impact of the overall uncertainty in global economic conditions and its impact on telecommunications, information technology hardware, automotive, consumer electronics and other electronic markets. Looking ahead, visibility is low and forecasting is a challenge in this uncertain and volatile market. Some markets we serve have slowed as a result of the unprecedented global credit crisis and softening of the global economic environment. We expect to see continued pricing pressure in the markets we serve as our customers look to offset the impacts of the current economic downturn and rising production costs. In response to anticipated market conditions, we expect to continue to focus on cost reductions and expect additional restructuring actions in the near term for overhead reductions and product line rationalization. We also continue to focus on process improvements and enhanced production capabilities in conjunction with our focus on the sales of value-added electronic components to support today's sophisticated electronic devices. If conditions in the credit and capital markets worsen, the overall impact on our customers as well as end user demand for electronic products could have a significant adverse impact on our near-term results.

Long-Term:

Although there is much uncertainty in the near-term market as a result of the current economic conditions, we continue to be optimistic that opportunities for long-term growth and profitability will continue due to: (a) a projected increase in the long-term worldwide demand for electronic devices, which require electronic components such as the ones we sell, (b) cost reductions and improvements in our production processes and (c) opportunities for growth in our Advanced Component and Connector product lines due to advances in component design and our production capabilities. We have fostered our financial health and the strength of our balance sheet. We remain confident that our strategies to weather this current economic downturn will enable our continued long-term success.

Results of Operations

Year Ended March 31, 2009 Compared to Year Ended March 31, 2008

Net sales for the fiscal year ended March 31, 2009 were $1,389.6 million
compared to $1,619.3 million for the fiscal year ended March 31, 2008.

The table below represents product group revenues for the fiscal years ended
March 31, 2007, 2008 and 2009.


(in thousands)                   Years Ended March 31,
Sales revenue:               2007        2008        2009
Ceramic Components       $   228,136 $   211,759 $   165,740
Tantalum Components          286,943     312,761     268,326
Advanced Components          376,356     433,646     434,039
Total Passive Components     891,435     958,166     868,105
KDP and KKC Resale           434,857     468,186     354,258
KEC Resale Connectors         74,911      86,531      76,209
Total KED Resale             509,768     554,717     430,467
Connectors                    97,292     106,392      91,041
Total Revenue            $ 1,498,495 $ 1,619,275 $ 1,389,613

Passive Component sales were $868.1 million for the fiscal year ended March 31, 2009 compared to $958.2 million during the fiscal year ended March 31, 2008. The sales decrease in Passive Components reflects the overall decline in global markets resulting from the current economic uncertainty as both consumers and manufacturers reduced spending. Lower demand in the consumer electronics and automotive markets was partially offset by increases in the medical and military markets. Additionally, revenues were favorably impacted by the Company's strategy to focus on a higher mix of value-added products from our Advanced Components group and the effects of including ATC sales since its acquisition in September 2007. The decrease in sales of Ceramic Components reflects a decrease in the volume of unit sales, a higher mix of commodity priced components and a moderate decrease in average selling prices reflective of the downturn in the economy. The decrease in sales of Tantalum Components is the result of lower sales unit volume due to a decrease in demand for these components as customers reduced inventory levels in response to the overall decline in economic conditions during the fiscal year or changed product designs.

KDP and KKC Resale sales were $354.3 million for the fiscal year ended March 31, 2009 compared to $468.2 million during the fiscal year ended March 31, 2008. When compared to fiscal 2008, the decrease during fiscal 2009 is primarily attributable to a decrease in unit sales volume in the Asian region due to lower end user demand, particularly in the telecommunications market, resulting from the uncertainty in global economic conditions.

Total Connector sales, including AVX manufactured and KEC Resale connectors, were $ 167.3 million in the fiscal year ended March 31, 2009 compared to $ 192.9 million during the fiscal year ended March 31, 2008. This decrease was primarily attributable to a decrease in the automotive and consumer products sectors as a result of the adverse economy, particularly in the last half of the fiscal year. This decrease was slightly offset by increases in sales volume related to production demand for certain smart phone devices when compared to the prior year.

Geographically, compared to the fiscal year ended March 31, 2008, sales for the fiscal year ended March 31, 2009 decreased 11.2% in Europe and 0.7% in the Americas. Decreases in these regions were reflective of lower demand for product due to the decline of the global market, partially offset by an increase in the sales of Advanced Components products related to the addition of ATC in September of 2007. In addition, there was lower demand in Asia, where sales for the fiscal year ended March 31, 2009 decreased 22.9% compared to the prior year driven by declines in the consumer market. In addition, the movement of the U.S. dollar against certain foreign currencies resulted in a favorable impact on sales for the year ended March 31, 2009 of approximately $19.5 when compared to the prior year.

Gross profit in the fiscal year ended March 31, 2009 was 15.6% of sales or $ 216.3 million compared to a gross profit margin of 17.8% or $288.4 million in the fiscal year ended March 31, 2008. This decrease is attributable to several factors including the factors discussed above relating to lower sales coupled with lower production volumes and the increased cost of raw materials and utilities. We incurred restructuring charges of $15.1 million related to headcount reductions and other charges including those related to facility closures as we continue to realign production capabilities and reduce operating costs. We recorded $2.4 million of restructuring costs during fiscal year 2008. During the fiscal year ended March 31, 2009, lower end user demand and higher costs were partially offset by our continued efforts to increase production efficiency, lower operating costs and pursue increased capacity for the production of value added products. In addition, there was a negative impact on costs due to currency movement of the U.S. dollar against certain foreign currencies resulting in an unfavorable impact of approximately $34.4 million when compared to the prior year. Also, compared to the fiscal year ended March 31, 2008, depreciation and amortization expense in the fiscal year ended March 31, 2009 was $10.7 million higher primarily as a result of the acquisition of ATC.

Selling, general and administrative expenses for the fiscal year ended March 31, 2009 were $121.9 million, or 8.8% of net sales, compared to $126.8 million, or 7.8% of net sales, for the fiscal year ended March 31, 2008. The decrease in selling, general and administrative expenses was primarily due to lower sales and savings as a result of headcount reductions and other cost control measures starting in fiscal 2008 and continuing throughout fiscal 2009. During the fiscal year ended March 31, 2009, we recorded $3.5 million of restructuring charges primarily related to headcount reductions to reduce ongoing selling, general and administrative expenses.

Research, development and engineering expenditures, which encompass the personnel and related expenses devoted to developing new and maintaining existing products, processes and technical innovations, were approximately $35.5 million and $31.5 million in fiscal 2008 and 2009, respectively. Research and development costs included therein decreased slightly in fiscal 2009 to $11.7 million compared to $12.5 million in fiscal 2008. Engineering expenses decreased $3.2 million to $19.8 million in fiscal 2009 compared to $23.0 million in fiscal 2008.

Profit from operations for the fiscal year ended March 31, 2009 was $76.7 million compared to $161.1 million for the fiscal year ended March 31, 2008. This decrease is a result of the above factors, and the recognition of an $18.2 million environmental charge as an estimate of our potential liability related to the performance of certain environmental remediation actions at an abandoned facility in New Bedford, Massachusetts. See Note 12 to our consolidated financial statements elsewhere herein for further discussion related to this environmental charge. The overall decrease was partially offset by a gain of $4.0 million related to the sale of corporate assets during the fiscal year.

Other income decreased $21.8 million to $20.4 million in fiscal 2009 compared to $42.2 million in fiscal 2008. This decrease is due to lower interest income resulting from lower cash and securities investment balances and lower interest rates during the fiscal year and $4.2 million of impairment charges related to the decline in market value of certain available-for-sale securities. This decrease was partially offset by net currency exchange gains during the fiscal year.

The effective tax rate for the fiscal year ended March 31, 2009 was 16.8% compared to an effective tax rate of 26.5% for the fiscal year ended March 31, 2008. The provision for income taxes in the fiscal year ended March 31, 2009 was favorably impacted by $3.7 million of reinvestment allowances associated with operations in Malaysia and by a reduction of $8.5 million of deferred tax liabilities resulting from certain of our foreign branch losses taken as deductions for U.S. income tax purposes no longer being subject to the U.S. income tax recapture regulations. In March 2007, the Internal Revenue Service enacted a change in the tax regulations that reduced the U.S. income tax recapture period from 15 to 5 years. As a result, the income tax provision was favorably impacted by $8.5 million and $8.1 million of recapture that expired during the fiscal years ended March 31, 2009 and 2008, respectively. We estimate a further reduction in deferred tax liabilities of $16.6 million and $3.6 million over the next two fiscal years, respectively, as the recapture period related to foreign branch losses deducted in certain prior years expires. In addition, the effective tax rate for the fiscal year ended March 31, 2009 benefited from higher income being generated in certain lower tax rate jurisdictions when compared to the prior year.

As a result of the factors discussed above, net income for the fiscal year ended March 31, 2009 was $80.8 million compared to $149.5 million for the fiscal year ended March 31, 2008.

Year Ended March 31, 2008 Compared to Year Ended March 31, 2007

Net sales for the fiscal year ended March 31, 2008 increased $120.8 million, or 8.1%, to $1,619.3 million compared to $1,498.5 million for the fiscal year ended March 31, 2007.

In fiscal 2008, the demand for electronic components continued to increase as end users demanded more and smaller electronic devices with greater functionality. Compared to the prior year, Passive Components sales increased $66.7 million, or 7.5%, to $958.2 million, KDP and KKC Resale sales increased $33.3 million, or 7.7%, to $468.2 million and total Connector sales, including KEC Resale connectors, increased $20.7 million, or 12.0%, to $192.9 million.

The sales increase in Passive Components was partially due to the inclusion of ATC into our Advanced Components product group from September 25, 2007 (the date of the acquisition of ATC) coupled with higher sales volume for our Tantalum and Advanced Component products partially offset by lower sales for our base Ceramic Component products. Sales of ATC products from the date of acquisition of ATC were $49.8 million in fiscal 2008. The overall sales result reflects a market with increased end-user demand for products containing passive electronic components. Our Advanced Component sales increased 15.2% compared to the prior year. Advanced Component products generally command higher selling prices due to the unique solutions they provide in meeting more sophisticated end-user requirements in electronic component devices. The Company saw relatively stable pricing during the fiscal year on commodity products due to increased demand and steady industry manufacturing capacity utilization. Advanced Component sales included 26.0% and 20.0% of tantalum advanced component sales during the fiscal years ended March 31, 2007 and 2008, respectively.

KDP and KKC Resale sales increased $33.3 million, or 7.7%, to $468.2 million for the fiscal year ended March 31, 2008 compared to sales of $434.9 million for the prior year. The increase is attributable to a 24.8% increase in sales unit volume resulting from increased customer demand when compared to the prior year, partially offset by a product mix with lower average selling prices.

Connector sales, including KEC Resale connectors, increased $20.7 million, or 12.0%, to $192.9 million for the fiscal year ended March 31, 2008 compared to $172.2 million in the prior year. This increase was primarily attributable to a 14.3% increase in unit volume partially due to increased demand from the automotive sector, as more electronic content and functionality is being built into today's vehicles, in addition to increased customer demand for complex handheld electronic devices.

Our sales to independent electronic component distributors represented 41.0% of total sales for the fiscal year ended March 31, 2008, compared to 42.2% for the fiscal year ended March 31, 2007. Our sales to distributors involve specific ship and debit and stock rotation programs for which sales allowances are recorded as reductions in sales. We record an estimated sales allowance for ship and debit and stock rotation at the time of sale based on sales during the period, credits issued to distributors, distributor inventory levels, historical trends, market conditions, pricing trends we see in our direct sales activity with original equipment manufacturers and other customers and input from sales, marketing and other key management. Charges for ship and debit and stock rotation were $43.0 million, or 6.1% of gross sales to distributors, for the fiscal year ended March 31, 2008 compared to charges of $38.1 million, or 5.7% of gross sales to distributors, for the fiscal year ended March 31, 2007. We had remaining allowances for ship and debit and stock rotation of $11.9 million and $12.9 million at March 31, 2007 and 2008, respectively.

Geographically, compared to the fiscal year ended March 31, 2007, sales for the fiscal year ended March 31, 2008 increased 12.0% in Asia and 11.4% in Europe reflecting increased customer production and demand in the Asian and European regions, as well as the effect of the weaker U.S. dollar in those regions, while the Americas experienced a 1.0% decrease in sales. The Asian and European regions experienced increases of approximately 20% each in unit sales volume. The weakening of the U.S. dollar against certain foreign currencies positively impacted consolidated sales by approximately $40.0 million during the fiscal year, when compared to the fiscal year ended March 31, 2007.

Gross profit for the fiscal year ended March 31, 2008 was $288.4 million, or 17.8% of sales, compared to $297.2 million, or 19.8% of sales in the fiscal year ended March 31, 2007. This decrease is due to several factors including an increase in material costs due to higher metal prices, higher utility and transportation costs in addition to higher reported cost resulting from the weaker U.S. dollar primarily in the European region. This decrease was partially offset by a product mix reflecting the Company's marketing focus on higher margin value added products in addition to an improved cost structure as the Company continued to enhance production capabilities in lower cost facilities and implement cost reduction actions to reduce operating costs. In addition, in fiscal 2008, gross profit was negatively impacted by $2.4 million as a result of headcount reduction costs. During the fiscal year ended March 31, 2008, reported costs were unfavorably impacted by approximately $50.5 million due to currency translation as the U.S. dollar weakened against certain foreign currencies when compared to the fiscal year ended March 31, 2007.

Selling, general and administrative expenses for the fiscal year ended March 31, 2008 increased 8.9%, or $10.4 million, to $126.8 million, or 7.8% of net sales, compared with $116.5 million, or 7.8% of net sales, for the fiscal year ended March 31, 2007. The $10.4 million increase in selling, general and administrative expenses was due to higher direct selling expenses primarily due to higher commissions on increased sales in addition to slightly higher employee wage and benefit costs. This includes the impact of the increased sales and related expenses of ATC products during the second half of the fiscal year ended March 31, 2008. In addition, we recognized $2.0 million for amortization of intangibles related to the ATC acquisition.

Research, development and engineering expenditures, which encompass the personnel and related expenses devoted to developing new and maintaining existing products, processes and technical innovations, were approximately $29.4 million and $35.5 million in fiscal 2007 and 2008, respectively. Research and development costs included therein increased slightly in fiscal 2008 to $12.5 million compared to $11.3 million in fiscal 2007. Engineering expenses increased $4.9 million to $23.0 million in fiscal 2008 compared to $18.1 million in fiscal 2007.

As a result of the above factors, and the recognition of $0.4 million of an in-process research and development charge related to the ATC acquisition, profit from operations for the fiscal year ended March 31, 2008 was $161.1 million compared to $180.7 million for the fiscal year ended March 31, 2007.

Other income increased $5.4 million to $42.2 million in fiscal 2008 compared to $36.9 million in fiscal 2007. The increase is primarily due to higher interest income resulting from improved rates of return on higher average balances of invested cash and securities partially offset by realized currency losses.

The effective tax rate for the fiscal year ended March 31, 2008 was 26.5%. The provision for income taxes in the fiscal year ended March 31, 2008 was favorably impacted by a reduction of $8.1 million of deferred tax liabilities, compared to $3.4 million in the prior year resulting from certain of our foreign branch losses taken as deductions for U.S. income tax purposes no longer being subject to the U.S. income tax recapture regulations. In March 2007, the Internal Revenue Service enacted a change in the tax regulations that reduced the U.S. income tax recapture period from 15 to 5 years. In addition, the effective tax rate benefited from higher income being generated in certain lower tax rate jurisdictions. This compares to an effective tax rate of 29.3% for the fiscal year ended March 31, 2007.

As a result of the factors discussed above, net income for the fiscal year ended March 31, 2008 was $149.5 million compared to $153.9 million for the fiscal year ended March 31, 2007.

Liquidity and Capital Resources

Our liquidity needs arise primarily from working capital requirements, dividends, capital expenditures and acquisitions. Historically, the Company has satisfied its liquidity requirements through funds from operations and investment income from cash and investments in securities. As of March 31, 2009, we had a current ratio of 7.6 to 1, $762.5 million of cash, cash equivalents and investments in securities, $1,669.8 million of stockholders' equity and no debt.

Net cash from operating activities was $65.0 million for the fiscal year ended March 31, 2009, compared to $181.9 million for the fiscal year ended March 31, 2008 and $245.0 million for the fiscal year ended March 31, 2007. The decrease in fiscal 2009 is primarily the result of lower earnings and increases in net working capital.

Purchases of property and equipment were $44.2 million in fiscal 2009, $70.9 million in fiscal 2008 and $51.9 million in fiscal 2007. Expenditures primarily related to expanding the production capabilities of the passive component and connector product lines, expanding production capacity in lower cost regions, as well as the implementation of improved manufacturing processes. We continue to make strategic capital investments in our advanced and specialty passive component and connector products and expect to incur capital expenditures of approximately $35 million in fiscal 2010. The actual amount of capital expenditures will depend upon the outlook for end market demand. During fiscal 2009, we paid out $6.7 million related to contingent consideration from a previous acquisition whose purchase price was based on future sales and profitability of products related to the acquisition.

Our funding is internally generated through operations and investment income from cash and investments in securities. During the current downturn in global financial markets, some companies have experienced difficulties accessing their cash equivalents, investment securities, drawing revolvers, issuing debt and raising capital generally, which have had an adverse impact on their liquidity. We have assessed the implications of these factors on our current business and believe that based on the financial condition of the Company as of March 31, 2009, that cash on hand and cash expected to be generated from operating activities and investment income from cash and investments in securities will be sufficient to satisfy the Company's anticipated financing needs for working capital, capital expenditures, environmental clean-up costs, research, development and engineering expenses and any dividend payments or stock repurchases to be made during the upcoming year. While changes in customer demand have an impact on our future cash requirements, changes in those requirements are mitigated by our ability to adjust manufacturing capabilities to meet increases or decreases in customer demand. Additionally, we do not anticipate any significant changes in our ability to generate or meet our liquidity needs in the long-term.

In fiscal 2007, 2008 and 2009, dividends of $25.8 million, $27.5 million and $27.3 million, respectively, were paid to stockholders.

On October 19, 2005, the Board of Directors of the Company authorized the repurchase of 5,000,000 shares of our common stock. On October 17, 2007, the . . .